China’s Two Sets of Books

Welcome to Shield of the Republic a podcast sponsored by the Bulwark and the Miller Center of Public Affairs at the University of Virginia and dedicated to the proposition articulated by Walter Littman during World War two, that a strong and balanced foreign policy is the shield of our Democratic Republic. Eric Edelman, counselor at the Center for Strategic and budgetary assessments, a Bulwark contributor, and a non resident fellow at the Miller Center. And I’m joined by my partner in all matters, strategic Elliot Cohen, the Robert E Ozgood professor of Strategy at the Johns Hopkins School of Advanced International Studies and the Arleigh Burke chair in Strategy at the center for strategic international studies. Elliott, how are you doing?

I’m doing great. So last night, Eric, we had a, wonderful dinner for a hundred and sixty of, the alumni of the strategic studies program at, Hopkins. Where you and I have both taught for a long time. And one of the really nice things is I had a whole stream of alumni coming up saying that they listen to the podcast and look forward to it every week. So I’ll just take this opportunity to say, great to see those of you who could make it.

Sorry. I missed those of you who couldn’t make it. And keep on listening to the podcast. And, with that, let’s give them another great session.

Alright. Well, our guest, I’m Happy to welcome today is a friend and colleague, Gleland Miller, who’s a non resident senior fellow at the Asia Security initiative of the Atlantic Council Scocross Center on strategy. He’s also co founder and CEO of the China beige Book International, which He’ll explain to our listeners in a second. He’s a a distinguished commentator on all things having to do with China and his been published in the Wall Street Journal, New York Times, South South China Morning Post, etcetera. He’s a graduate of Washington and Lee University with, an MA in Chinese history from Oxford and a law degree from the University of Virginia.

Lee, welcome to Shilda Republic.

Thank you. It’s great to, be here with old friends.

Ali, maybe, you could tell us a little bit. Tell our listeners a little bit about what China beige book is so they understand the sort of evidentiary basis on which a lot of the things you’re gonna say comes from.

Yeah. That’s the right the right question, though, but up with because, you know, these days, pretty much everyone is a China expert. And the real first question you have someone is, you know, why would I believe you instead of what I’m reading or what someone else is telling me? There’s so few sources of data, sources of information on China be relied on. You know, the question is why is any particular person worth listening to?

So, you know, back in two thousand ten, I started a firm called China BeijBook and we are the largest private data collection operation in the world inside China’s economy. And, you know, we we we decided to start this up for a very simple reason, which is we didn’t believe the data that Beijing was putting out on its own economy. And we didn’t think that investors should either. So very early on, you know, during the great financial crisis, we we we spent about two years putting together a very, broad survey of the of the Chinese economy that that didn’t have any of the traditional biases. So we went big We we survey every geographic region in China.

All the major sectors, thirty seven discrete subsectors. We street track private firms and state firms. We track large firms and small firms. We track everything that’s going on in in in the in, you know, in the in the growth world. But we also track the labor market.

We track inflation. We track the credit environment. We track shadow credit. So what we try to do is not put out a single number that said, this is China. This is the GDP growth number.

So this is China. This is the PMI number. So this is China. We put out a whole slew of numbers, thousands of these numbers, for over a decade now, trying to say these are all the different China’s. And and in the aggregate, we can understand what’s actually happening in China.

Beyond the, you know, the data that Beijing expects us to, you know, to to to rely on.

Lee, could I ask you, you know, given the as you say, the the that come out of China are frequently dicey. And if I’m not, mistaken, the Chinese government is now kind of cutting back on some of the numbers that do come out, how do you sift out the the stuff that’s true from the stuff that’s not true and how do you deal with the numbers that you know, simply are are no longer, being released.

Yeah. So our starting point was the idea that anything that was coming out of Beijing we we should be skeptical on. Now the truth on this so so basically China and Facebook, we collect entirely our own numbers. We don’t do these leading economic indicators where we take eight Chinese official statistics and then put them through our own special sauce. And then when they come out the other end, we pretend that they’re independent data.

We actually, from the very, you know, from tracking it from the ground up, across the entire country, every piece of data that we digest and we put out is China beige Book data. Nothing to do with the government. No Chinese middlemen. So that’s the ultimate answer to the question is you don’t trust any of it. But, you know, if you look close enough to data over time, you understand that some Chinese data are fairly reliable.

Some are absolutely terrible. I mean, I think on the terrible end would be anything involving unemployment, although they have been announcing worse unemployment, numbers recently before before doing away with the indicator in terms of youth unemployment, credit indicators are are often in the middle. They’re sort of good faith effort to try to get at what’s happening. In the banking sector, in the shadow banking sector, you know, but we found that they are extremely unreliable because they’re these these big national numbers that talk about credit supply, how much basically, you know, the PBC is is vomiting into the economy much of the time that credit goes to very specific subsets inside the economy, large firms, state firms, tier one firms, coastal firms, whatever it might be, not broadly across the economy. And so people think that, oh, a jump in credit will mean a a boost in activity, better growth numbers that doesn’t happen.

So what we’ve tried to do is is is is is actually see what firms on the ground were doing. This started out as a quarterly exercise. It moved into sort of being a monthly exercise. Now it’s reported in real time as we collect the data. And so the idea here is we have one eye on all this official data.

We don’t really believe it, but we understand that’s what the market’s based there. They’re they’re their views on. So we try to have a story that that either, that discusses what the market, the market thinks but not relies on it. So, you know, some usually usually investors are either very, very bullish thinking, you know, the the economy is about soar, stock markets of the soar, or they’re they’re very bearish like they are now thinking the economy is, you know, always one day away from collapsing. We we have because we have more data, we have a nuanced view.

We’re usually somewhere in the middle, like we are now.

Is is it harder to get, reliable data then in the past, I mean, our I would, you know, I would imagine some of your usual interlocutors would be a little bit more reluctant to to talk to you. And if I could just ask another question at the same time and let you deal with both, do you think that there’s, like, a real set of numbers the Chinese decision makers work from, or are they making some decisions? Really in the dark because the numbers that they’re getting are also corrupted in a variety of ways.

I absolutely think that there is a real set of numbers and an there’s a numbers that they set of numbers that they put out publicly. It was very interesting during times of of enormous stress, you know, back in twenty fifteen, twenty sixteen, during the particularly the early years of the pandemic, we would put out numbers that were quite different with what the government did. And then everyone would be surprised at how policy didn’t match what the government story was. And the reason for that is we said, look, look at look at what story we’re telling with real data. If you look at what’s happening, for instance, you know, coming out of COVID, the Chinese economy didn’t explode out of the original lockdowns in January twenty twenty.

According to Chinese government story, you know, they were back to year on year growth. Within weeks, Whereas what China Basement was doing was tracking actually every industry as it came back online. Was it at seventy percent capacity? Was it thirty percent capacity? We knew that the economy was in contraction for some of these quarters.

And, if you look at our data, you would understand that the the policy response the government had for some of this stuff. So yeah, there is definitely a set of government numbers that the people that are, you know, the leadership sees that nobody else sees. And then there’s what they released to the to the masses, which is usually much more, unreliable. Now you asked a question about whether it’s harder to do what we’re do doing right now. Certainly, the the environment on the ground is is is much tougher, much, much harder to operate in.

I think the you know, we we we keep some of the special sauce behind closed doors, but I will say this that when we started off thirteen years ago, we anticipated the day where the Chinese government would be cracking down harder and harder and harder on their economic data. And so we built China beige Book in a way that wasn’t as reliant as as as maybe some other, firms had had with their survey operations and with their data collection and we we were much less susceptible to massive Chinese crackdowns when they happened. So we’re still kicking, and, you know, knock on wood and, for doing what we’re doing.

Yeah. I think it’s probably worth, just, explaining to our listeners that the title China beige book essentially comes from the beige books of the regional federal reserve banks, which also in the United States collect data about the US economy essentially from from the ground up, you know, rather than top down.

Yeah. That’s right. So we named China Bayshwick. A lot of people who aren’t in finances say, what a stupid name. Well, China, Beijing came from a project.

Like Eric said, that the fed came the the the fed still releases. It’s basically a quantitative look at the US economy. You know, it’s different fed district banks interview people within their regions, and they try to get a qualitative flavor, what’s going on. What we realized early on with China beige Book, when we started out, we were partly qualitative and partly quantitative. And we found out is that is that we’re dealing with a very different, situation than the Fed is in the United States.

In in the United States, There’s ten zillion pieces of quantitative data that that everybody has at their disposal. So when made the beige book, the Federal Reserve beige book, interesting was that it was doing something different. It was bringing a qualitative flavor to a to a, you know, environment that already had bountiful amounts of quantitative data. When we broke in to China doing quantitative data and qualitative data, we said, okay. This qualitative stuff is is interesting.

But wow. The real treasure chest is the quantitative data because her chest is not large scale, you know, macro data for the economy. There was nothing on credit. There was almost nothing on inflation or the labor market and that, you know, the growth numbers that were out there were usually very big blunt numbers that reflected the dynamic in big cities or, you know, on the coast, wasn’t wasn’t something that really told the story of China. So We, we we adopted the Basbook methodology.

We quickly pivoted, but it is our roots. And so we’ve we’ve kept the name. And it certainly is you know, if nothing else, a very deep dive into the into the country the same way the fed, investigates the US.

I wanted to talk about something you all just, released, which was a kind of third quarter review. There’s been a lot of discussion about the Chinese economies problems and the problem it’s creating for Xi Jinping. Your third quarter take is sort of interesting at, you know, the headline, if I could steal it for a second, is the economy’s not that bad. It’s just pretty boring. But you also talk about that that’s a kind of short term look at things, but long term, the structural problems are are quite severe.

Can you kinda kinda do a quick review of that third quarter and and then talk about the long term structural problems that you see.

Sure. So so what happened if we go back to the end of last year when co when when when Xi Jinping pulled off the COVID zero Band Aid shocked everyone markets got ecstatic because what they were expecting was this giant rally. You know, you saw what happened in the United States when you go in and out of lockdowns, you saw this you know, huge consumer buying spree. A lot of people said, oh, well, it’s gonna happen with China next. It was never gonna happen in China next.

China is a a a a country that’s much more focused on savings. It’s not the consumer driven economy in the United States is. We also had a ton of consumer stimulus in in the United States. They didn’t have that in China. But what actually happened as we got into the year, and we said don’t expect this big rally, particularly early on.

Markets expected it. And when they didn’t get it, as markets are won’t to do. They Jonathan Last least, they flip from being extraordinarily bullish on the economy to thinking, this is the worst thing we’ve ever seen and gotten extraordinarily pessimistic. So as we got into the spring and eventually the summer, markets had not only given up on the Chinese recovery, say it didn’t happen. They decided China was collapsing.

And the backdrop for this, of course, is that, you know, there are there’s extraordinary weakness in the property sector right now. You’ve got these big shadow banks back in twenty twenty one. It was ever grand now it’s country garden that are wobbling. You know, the question is you know, is China contagion gonna spread outside property? Are they having a financial crisis?

Is this a layman moment? You know, or is China collapsing? The answer to this is absolutely not. China is not collapsing. It’s not even close to collapsing.

You know, we see in our data as, yes, a property sector is an absolute mess. But if you look at retail, you look at services, you some of these other sectors, there is sequential improvement. There’s definite on year improvement from the twenty twenty, year of of of lockdowns. What you’re seeing is an improvement economy. It’s just a pathetic amount of improvement considering we should be exploding out of a year that was filled with lockdowns.

We’re not. We’re just slowly, prophetically improving at a very slow pace. So there is recovery going on. And, you know, the the property sector woes are are significant. I think we have to keep in mind one core core concept.

China has a non commercial financial system. This is why it will not have a layman moment. The expectation was, will the US had its lehman moment and then Europe had its lehman moment while China’s next? China’s not next. A noncommercial financial system means that China controls all the counterparties.

Inside the economy. If it if there’s a liquidity freeze up, it tells lenders to lend. It tells borrowers to borrow. Tell suppliers to supply. So you’re not gonna have a situation where liquidity freezes up across the economy because the government won’t allow that to do do so.

What happens is is you have tidal waves of capital going from one side of the account to the other patching up holes. So you have a problem. You move You have good companies buy to bad companies. You have local governments bailed out by by by central government or local governments billing out local government financing vehicles. Essentially, this avoids an acute crisis.

It makes China extraordinarily not susceptible. To a layman moment. But what it does is it drives you towards, a much tougher and which is a a future of extraordinarily low growth. So Stasis in a very low growth environment as all the new capital instead of going into productive uses instead of going into you know, supporting innovation in the economy. It’s good money goes after bad.

Capital goes after nonproductive uses and paying off debt instead of productive uses. And you have an economy that’s going, long term into extraordinarily slow growth. I mean, what what are two percent? So structurally, So so just to sum that up cyclically, we think people are are far too bearish, but structurally, we think they are far too bullish still. China’s gonna slow down more.

So it, you know, I was just in Taiwan for about a week. And one thing that was interesting talking to people there, they said that a lot of Taiwanese businessmen who operate in China are shifting a lot of their operations to, Southeast Asia. And they said it’s not for political reasons. It’s you know, this sort of sense that long term, China’s in trouble. And I was wondering if you could tease that out a bit more.

So you say one to two percent growth How is that going to interact with the fact that they seem to have a very rapidly aging population? And, you know, what are can you tease out? What are some of the longer term implications of that?

Well, the the comparisons often made us to Japan, and I think it’s a good one. You know, we started writing about this over a decade ago. The the difference with Japan and China is, you know, they are both old countries, but Japan got rich before it got old. And China is still a very poor country. That is getting old without getting rich.

So the challenges there are much more significant than with Japan. So you have a situation when you look, you know, look forward ten, twenty, thirty years where enormous challenges will be will be pressing against you know, the the the Chinese communist leadership, you know, we talk about debt and how the enormous amounts of debt are gonna be forced downward pressure on growth The demographic situation is another one. You know, working age population has peaked. There’s a huge male, female imbalance. In addition to that, you also have very slowing rates of birth that so now these are these are things seen elsewhere, but they’re much more problematic in China than most places simply because The economy is it’s it’s big.

China will be a powerful country, but it’s a poor country. And that means the pressure on the leadership will be even more than than other places. And keep in mind, when you have pressures on leaderships generally of a democracy, you you toss the bums out. You have a, you know, you take somebody two, four, six years. They do their thing.

You toss them out. You bring the next guys in. Toss them out. It’s a pressure valve on the system. In a one party system like China, you don’t have that.

It means that everything negative happens redounds upon xi. It redounds upon the Chinese Communist Party, which means that you have so much pressure during times where there really is no longer pressure valve and and growth is slowing and the company the country’s still poor. So the challenges that China are seeing are similar to what Japan has dealt with for the past, you know, thirty plus years, but they’re much more severe.

From the outside. It looks as though China is a very effective repressive state. You know, much more effective in many ways than Russia is So, I mean, can’t they kind of repress their way through that? That is to say, okay. We’ve they’ve got this demographic problem.

You’ve got a a aging population and, you know, you don’t really have the resources to give them pensions. That’s not how China works in any case. You know, can’t the government just say, okay, that’s too bad when you’re old, you’re old, and if you’re poor, that’s your problem. And, you know, we’ll continue to do the things we need to do to build up China as a really major world power. I mean, it’s I I suppose the larger question is can they just repress their way out of that?

They can until maybe they can’t. So the the answer to the question is that’s that’s what they’re doing right now. I mean, essentially, they’re saying, look, we’re we’re focusing on, you know, a slower, healthier Chinese economy. We’re battening down the hatches because from a national security perspective. We’re worried about the pressures of United States with a dollar system where the US controls the dollar system around the world.

We were worried about a domestic chip ecosystem that doesn’t exist without semiconductor inputs from the US and its allies. That’s what their focus on, and essentially they are telling everybody, hey, look, just just deal with it. Now Jonathan Last for five years, for ten years, for fifty years? We don’t know. But what it does mean is there’s more and more pressure building up from inside the system.

And so people who have been predicting that, you know, the Chinese government’s gonna fall to our Chinese company’s party is gonna fall tomorrow. You know, they’re always wrong until maybe one day in the future, they’re not. But because we don’t have very good visibility into that, All we know is pressure’s building and we don’t really know, you know, how that all nets out.

Well, just to pick up on Elliott’s point, Lee, you know, the demographic problem is one in, you know, that it kinda compounds all these other problems. Right? Because the lack of a social safety net means that Chinese people as they age have traditionally relied on their kids to take care of them as they get old. But because of the one child policy, there’s now, like, one kid, taking care of his or her aging aging parents and as the, working population, as you pointed out, drops, there’s just less wealth being generated to to deal with those health health consequences as as people age. I mean, do all of these structural problems mean as some people have argued that we’ve actually seen peak China.

I mean, I think there was this notion that people had is, oh my god. Chinese, you know, economy is growing. It’s gonna surpass the US economy at least in its overall size at some point, even if per capita, it will be lower because as you say it’s not a country yet, but they’ll they’ll dwarf us and then, you know, that they will take over the world. I mean, there was a book written about the time that you started China beige book called when China rules the world, you know, because there was this sense of this inexorable ascent of the Chinese economy, but there are now people saying that no we’ve hit peak China. So is is it your sense that these long term structural problems mean we’ve hit peak China And does that make the China problem more or less tractable, more or less dangerous in in your view?

Yeah. So there’s a lot of different wrinkles to that, but I think, I agree with the China peak theory in some important ways, but it needs to be clarified because I think if we’re talking about the idea the Chinese center I mean, I I can’t tell you how many articles were had to read. We all did for years and years and years about how this was gonna be the century that China rose. It would blowed past the u US and in GDP. It would it because of increases in productivity that would magically appear, you know, it would be three times the size of the United states economy by two thousand and seventy or whatever the numbers were, those were never right.

I mean, we were pushing back on that. There were structural reasons why the Chinese economy couldn’t continue what they were doing. For much, you know, for for terribly long, and and and we’re already seeing that play out. So from a economic growth standpoint, China may never pass the United States. I think that if they did, it would it would it would be a negative for them because it would mean that Xi Jinping would sort of instead of instead of pushing some of these restructurings he’s doing and and reforms the system for instance in the property sector that he’s been pushing it to to great pain over the last several years.

It means he says, oh, no. It’s it’s important for us to symbolize to signal that we’re gonna surpass the United States. So We’re gonna juice GDP. We’re gonna we’re gonna reopen the stimulus stimulus playbook. I think it would be a bad sign in other words if China passed us on economically not a positive one.

But here here here’s where I think people get tangled up. China is going to slow dramatically going forward. Best case scenario, it slows dramatically. Worst case scenario, it it it slows dramatically under different circumstances. But what what is a what is a government like China?

Is a a state, you know, totalitarian government that controls its its economy, controls its financial system. What is it really good at? Marshalling the forces of the state to accomplish one or two or five or ten really big things. And We already have a playbook for what those big things are. They were made in China twenty twenty five, but Xi Jinping announced in the last decade, and they have been come to to be understood as artificial intelligence, quantum, biotech, five g, robotics, etcetera, basically advanced technology.

So the irony of all this, and I think why people have a hard time figuring out well is is is is it a bigger federal economy slows? What does that mean? Well, the the takeaway here is that even as the economy slows dramatically, China’s ability to harness, It’s resources. It’s it’s subsidies. It’s foreign policy towards very, important advanced technology goals means it becomes an enormous threat to the United States and to others in certain very specific ways.

So if if if if if China has a slowing economy, but it dominates AI and quantum and some of these other things in the future. That’s a real problem for US power for prestige. For the US, presence in the Pacific. Maybe for defending Taiwan if this goes into creating the advanced missiles that that that that that we can’t defend against. So it’s a weird, weird juxtaposition, actually, in which despite the fact the economy slowing down, everyone can can look at that and say, okay.

The Chinese century idea was was was never was never real, and it’s certainly showing itself to be to to be not real. At the same time, China is a very real threat in very specific ways, specifically on advanced technology, that that has commercial applications. It also has a military side to it. And so the United States should be more worried, not less worried despite the fact the economy is not in anywhere meeting the target goals that a lot of, optimists had for it, you know, five, ten, twenty years ago.

Could I ask you a a a political judgment then? And again, I’m going off some of the conversations I had in in Taiwan. You know, there really seem to be not surprisingly two different views. One is as the economy slows down, is there these kind of substantial internal problems, which, she feels compelled to address One argument is that turns them inward. It makes them actually less of a problem externally.

And the other, of course, possibility is no. Actually, it, drives them to look for adventures abroad and there’s sort of the wag the dog theme. Which do you think it is? I mean, what which way do the do the challenges of managing a much slower economy with some some associated crises presumably that they’ve gotta manage which direction do you think it’s likely to, push them externally?

Yeah. Well, we we don’t know for certain, but I worry it’s the latter. I I worry that With a slowing economy, what that’s effectively doing is is shortening the window for action for for significant international action. You know, under the old idea that, you know, Mao zedong talked about and Dung talked about and others have for years, China had all the time in the world because China was rising and the west was falling. To the extent that what I’m saying is not just understood, but understood by the leadership and acknowledged by the leadership recognized as the trajectory for China going forward.

I think that that would come hand in hand with an with a understanding that China doesn’t have as much time to do to do some of these things as as as it’s projected in the past. So if you’re talking about, you know, an invasion of Taiwan, that moves a potential, time for an invasion or block cave from two thousand and fifty when China’s, you know, continues to rise to around two thousand and thirty or earlier, you know, somewhere around Toyota because, you know, the military asymmetries have have narrowed considerably. The economy may be slowing down dramatically, even more dramatically, you know, you know, a decade from now. There may be more political pressures United States may may get its act together and and beef up chai chaiwanese deterrence more. The world the world may be different, and it won’t be a China rising environment.

It’ll be a China under pressure environment. So I am actually of the mind that as we progress in this and and as the Chinese leadership starts to understand the limitations to their growth model and the limitations to this China rising thesis that this actually narrows the window considerably for any type of aggressive international actions they’ll do whether it’s Taiwan or South China City or others. And so, I I’m I’m I’m very worried that people don’t take this seriously enough. I think the window for action is shrinking right now. The time period for action is shrinking.

Well, that’s really sobering. You know, my, you know, I’ve now I’ve heard a number of people say, really, the way we should talk about China is not as though we’re talking about anything even faintly resembling a collective leadership but instead it’s really a dictatorship of one man at this point, Xi Jinping. You know, with all the things that are associated with having a an aging dictator who, you know, is hitting seventy and hasn’t had anybody contradicting him in a forceful way for a decade and so on and so forth. Could you speak to that? I mean, what what and maybe if you could speak to it both, Again, you know, wearing a a political hat, looking overall the conduct of Chinese foreign policy as well as domestic policy, but also How how it affects economic management?

Because, you know, it seems to me that you’re you’re more likely to make some further errors if you have just one guy who’s really established a kind of dominance that gonna make I tend to think even Dengoping didn’t have. Calling all the big shots on the economy. So if you could riff on that, I’d be grateful.

Sure. So that’s the great fear that she is increasingly know, an isolated dictator and making decisions based on whatever he thinks in his head maybe without very good information, his fingertips. I mean, we certainly saw that with Putin. There’s no reason to think some of that’s not happening with sheen. We just don’t know.

What I think is very clear based on the way that various programs over the last five years, particularly under co the COVID era, occurred. It seems that there really is rule by one, and then lower or mid level cadres hear the message, and they say, well, The safest thing to do is just to take that message and wrap it up to, you know, to attend. And so whatever Xi Jinping says, we are going to be extraordinarily forceful with this you saw that with COVID zero in the way that COVID zero was applied in such a draconian fashion. So the what seems to be happening is, you know, you you you have a message from the top instance, look at the economy. Twenty twenty three, according to the Commerce Ministry in China, was supposed to be the year of welcoming foreign businesses.

At the same time, there was some stuff set at the very top about data security and some of which has been reversed, but data security and and and and and worries about, you know, national security focused industries huge crackdown. Foreign businesses were crackdown on foreigners were arrested This is during the year of welcoming foreign foreign investment to China. There’s always this contradiction and the contradiction is from the top saying something, but then mid level cadres, lower level cadres, maybe even senior cadres reading the tea leaves and saying, I am more politically protected. If I take whatever she is whispering out there or whatever we think she is is saying behind the scenes, and we just drive this to a ten. And that means there’s enormous policy conflicts, and and, and, and, and, and, and, and, in coherence.

So I think that’s one of the problems. Obviously, the the the biggest downside to this would be if she is hearing something on Chinese military strength, ability to project power in certain ways, economically, but particularly militarily. And he thinks that they have an ability to do something aggressive, and maybe they don’t, but it leads him into an aggressive an aggressive, strategy, just and nobody will speak up Ron DeSantis is a really dumb thing to do. So We saw that with Putin. This could be happening with Xi.

We just don’t know.

One one thought that I would wanna hand it over to to you, Eric, you know, I think it’s a common, pattern in every absolute dictatorship you know, the phrase in Hitler’s Germany was working towards the fuhrer. That is to say you weren’t necessarily following some explicit instruction, but you kinda knew what the big guy or you thought you knew what the big guy wanted. And therefore, you would do that to the maximum. And that that sounds to me like the sort of phenomenon that you’re describing with, with Xi, that you take what you think they want, and you dial it up to a ten. So and and I think you’re absolutely right.

You know, you certainly see that in, Putin’s Russia as well.

Safer to be on the Xi Jinping side. No question.

Although, I I would point out that, you know, in these systems where as you say, there’s a sort of, you know, implicit guidance which people are then meant to follow on their own, it can also get screwed up by people trying to do it within the bounds of what their bureaucratic position is or what, you know, what interest they have and they’re trying to interpret the, you know, the big guy’s guidance. I mean, in the German case, for instance, German general staff had a very different idea of what, the way to fight a war than Hitler did, and and those differences, you know, made themselves felt throughout the war and arguably crippled the, the German war effort in crucial ways. So taking that actually as a de point of departure, Lee, you talked about, you know, the time horizon for action shrinking. You know, this is sort of what, our end, admiral Phil Davidson, you know, has, called, you know, it’s been called now after his argument gotta be ready by twenty twenty seven, you know, the Davidson window. Right?

Because Xi Jinping has told the military, be ready by by twenty twenty seven. Not clear to be ready for what, but be ready. So the question is, what do you think is more likely to be something that the Chinese leaders Xi Jinping and those around him would look to do. Would it be the invasion of Taiwan which is a huge roll of the dice, right, a very risky, very complicated military operation. Most complicated military operation there is moving over ninety miles of open water to launch a amphibious, you know, invasion, very, very tricky to carry out.

Or would it plus it brings in its wake all sorts of disruption economically, not just to us, but to China as well. Or would they be more likely to do something, like the blockade that you mentioned, you know, which is throw a blockade around the island, dare the US to run the blockade and put us in a position of striking the first blow essentially. Using their new built up nuclear forces to threaten, you know, nuclear retaliation against any blow waged by the Americans, you know, arguably reflecting the fact that they’ve seen how much the US is responsive to Putin’s nuclear threats in Ukraine. Which do you think is, you know, more likely to come out of the sort of policy more when when all is said and done.

Probably the blockade because it has much more chance of success. Look, if an invasion can be done quickly enough, and it becomes a fair complete. I, you know, I have no doubt the air pans would fold immediately. And and, you know, the idea would be, well, there’s nothing we can do here. What’s redefined, you know, the the line the the sea lines of defense and you know, we’d wake up one day and and China would have Taiwan and and nobody would challenge it.

If they thought they could really accomplish that fast and the level the deterrence capabilities were were low, which of course will happen if we don’t get serious about about, arming Taiwan in in the coming years. But I I think that, you know, you could see a fair company scenario for an invasion be something they’re looking but the blockade would be much harder to much harder to deal with. The question is to one end. So, yes, so the Chinese could accomplish a blockade much much easier than they could in invasion. But what are they doing there?

So are they they’re risking a potential escalation to serious economic sanctions and others, maybe not the same levels as an invasion where they’re killing a bunch of Taiwanese on the ground. But what’s the goal? Is the goal for the Taiwanese then to relinquish the island? Is this goal to force the United States to change its force posture? Are those likely in that scenario?

So, I think that it would actually be a very difficult situation. If if the Chinese invade you know, we’re probably entering World War three. If they’re doing a blockade, I think there would be enormous confusion on the US side. Well, what’s the proper What’s do we wait them out? Do we do we clamp down?

Or I think there’d be enormous, dissension in the new US political community and amongst China experts. So in some ways, I’m more worried about the blockade scenario because it’s the it’s it’s easy to see how something the Chinese see is attainable, which is a successful blockade could escalate into a kinetic confrontation much easier than the invasion that either goes awry or a conversant. So I I worry much more about about confusion and, and and mixed messages coming from a blockade.

Can I drag us back to the economy for a while, and I’m trying to figure out how to formulate this exactly? I so let me try it this way. You know, I think, if if you go back to where people were in the thirties, forties, and fifties, they they thought Well, you know, you look at the Soviet Union. It’s not as nice a place to live as the United States, but it does go to show that a command economy, you know, centralized, Lennonist dictatorship can actually deliver incredible economic results. Which, in some ways, can outpace those of the west.

And then we came to the conclusion. No. No. No. And, certainly, by the time you get to the end, that the the built in dysfunctions of a Ron DeSantis style dictatorship or such that Although you can have a pocket here or there of, you know, maybe military technology that’s good or, you know, some narrow field, like, you know, certain kinds of metallurgy, because of the amount of resources they’ve thrown at, they’re just systemically unable to compete with a open capitalist economy like the American.

And then you have China. And, okay, at first, well, the story we we tell ourselves is, well, the reason why the Chinese economy is so productive is because they are opening up. They are turning to things that look more like the rule of law. They are, you know, giving greater room for free speech, even certain kinds of association and so on. But now we’re back in, a, you know, a much, much more authoritarian China, and it is striking, you know, the the overall level of productivity of the the economy and, you know, all the stuff that we we use day to day.

I mean, I’m, we’re gonna be redoing a roof. We’ll probably put in solar panels. I’m sure the solar panels will be manufactured in China. Personally, I would never touch Huawei, but I can understand that other people do buy Huawei phones, and I’m sure they work perfectly well, or you name it. And so I wonder if you could reflect on on that a bit.

Should we kind of revise some of our assumptions about what an economy, not just in an authoritarian state, because, I know, Villa, Germany was an authoritarian state too in many ways. But in a real lending style dictatorship, how productive, how competitive can it really be?

Well, I think that the the old model would be to look at the size of the economy and say, okay. Well, this is gonna be a competitor of the United States or a peer competitor or some sort of threat the United States growth because of the aggregate GDP growth. I think what we’re seeing with China is a very different dynamic, which is, yes, it can compete in certain technologies and and surpass the United States and certain technologies. We talked about AI and quantum. These are these are big battles, but it’s the integration into the supply chains at the real issue.

So right now, if if if things deteriorate and we decide that we are going to press certain policies forward and there’s a Chinese counter reaction, we’re gonna wake up one day and say, we have absolutely no idea what’s in our own supply chains. We have no idea what our vulnerabilities are to the to to China in terms of antibiotics. I mean, are how much of the inputs are coming from China? Can they shut off the supply of penicillin in the United States? Something people worry about.

You look at green technology, certainly, battery technology, certainly. So you have all these all these inputs that are that are made in China and part of this global supply chain and we just don’t know we just don’t know what the level of vulnerability is for the United States in small ways or big ways. So I think the big task of the coming years. And yes, this is something the Trump administration started, the Biden administration has been doing a lot of. It’s just try to understand how vulnerable we are in certain supply chains so we don’t get surprised.

What are the really important supply chains, technology, you know, what falls under the national security rubric? Technology certainly does at this point. I think we’ve acknowledged. I would think pharmaceuticals do, other other health care products that are that are necessary, and then figure out how to disentangle those from China altogether. It’s not something we could do overnight, but we really have to push it.

And we have to stop listening to corporate interests saying this is painful on share price we have got to do it because this is a national security priority. Broter, there are gray areas, and then there’s things we don’t care if China makes all the socks in the world and they wanna send us their cheap socks. So I think we have to figure out exactly what the national security priorities are in terms of supply chains and focus on them in a much more aggressive way on a much faster timeline than we’ve been doing. And and and I because I think that’s the problem. The problem isn’t the size of the economy it’s it’s not even the technological know how it’s, or the levels of innovation, you know, inside China that they’re incubating.

It’s the integration of the supply chains we don’t wanna wake up one day and realize we can’t get medicine. And, and, and that’s a real possibility if we’re not smart about it.

But you don’t Therefore worry about, say, the innate competitiveness of the Chinese economy with ours and things like technological innovation, except you know, as you said, in those few areas where the government says, yeah, we’re really gonna be world leaders in AI or quantum, computing or something like that. Have you In other words, the the basic advantage of having a rule of law based free enterprise transparent system is still dominates, in kind of broader economic, competition.

Yeah. Exactly. Like, ninety five percent of the time, you have an open market based innovation economy. It will outperform what China is, which is not market based. It it’s it saves state centered, authoritarian government that has national priorities that they throw money And so the the issue here is not about broad economic growth, where there were at a better trajectory than than China is in terms of, you know, ten, fifty, a hundred years.

Our system is superior to China as in doing that. What we have a real problem with is the idea that if there are five or ten things that are really important, again, coming back to artificial intelligence, advanced semiconductors, quantum, biotech, all these things that we that we keep keep keep hitting on, five g. China can throw money at them. If you look at what happened with Huawei, now Huawei is now being oversold. It’s it’s it’s it’s it’s one company.

It’s not it’s not the economy, but back, you know, back five years ago, one of the reasons people under started to understand the threat is they they saw that, you know, wall wall street journal investigation almost a hundred billion in subsidies went to went to Huawei. When Chinese Chinese foreign ministries, we wouldn’t negotiate with with countries. They would require that Huawei be you know, adopted as the five g architecture for the telecom. You had an the most unfair playing field you can imagine where the Chinese government said we are going to make sure that these advanced technologies are subsidized. They’re backed by the government.

Their markets are undercut in China, that they’re being pushed from a foreign policy perspective in those things, we have a real uphill battle. And that is why advanced technology should be number one, two, three, four, and five in terms of the issues that we’re dealing with. China right now on. Maybe six is investment flows. But look, what’s gonna happen in the coming months is a very political year.

We’re gonna be starting talking about more tariffs and economic growth percent. What we should be focusing in laser focusing in on is the advanced technology angle because that is something that China will defeat us If it’s a government backed effort going against our our our our market efforts here, then we gotta worry about that.

Lee, we’re coming, up here on, pretty much the end of our time I wanted to ask you, I think what in some sense is the most important question, which we haven’t asked yet, which is Why should the American public care about any of this? I mean, you know, what what does it actually mean to them? And we’ve talked about, you know, the competitiveness of our economy, as opposed to the Chinese economy. So obviously, there’s some implications for, you know, economic growth and prosperity. But, you know, the president of the United States has said on four different occasions, I believe that the United States would absolutely defend Taiwan against an invasion by China, which is a little bit of a departure from our traditional, policy since nineteen seventy nine, which is been one of, you know, greater ambiguity about whether we would actually do this or not.

He he was very, you know, quick to say we would, we would do that. Some of his subordinates have tried to, you know, kind of put a little more nuance into that after the fact what the president meant to say was, etcetera. But, you know, why should Americans care about this? You know, Viveak Ramaswamy has said, yeah, we need to defend Taiwan, you know, because they produce eighty percent of the world’s, you know, microprocessors. And because of the chip, we need to do it.

But once we, you know, onshore all that because of the inflation reduction act, and we don’t need to defend Taiwan anymore. So, you know, is that why we need to defend Taiwan? What what’s really at stake here?

Yeah. The, you know, packs of America, the rule based stores, a lot of a lot of, ways to describe what’s happened the last fifty plus years, but it has been a good system for the United States. It’s been a good system for the world. It’s it’s mostly kept the peace. I think one of the mistakes people make in in trying to look at something like Taiwan and saying, well, you know what?

It’s not that important let the Chinese have this. Let the Chinese have that. And, you know, maybe they’ll be sated. You know, let them have a few changes to UN, let them have a few changes somewhere else. And as they become more integrated in the order, then, you know, I think what piece will continue.

I think the problem is that it makes conflict more likely, the farther we walk away from this, the the, you know, the less of a, of a presence that we have in the Pacific It’ll it’ll weaken our line system. It’ll be Bulwark in our ability to make sure we’re always keeping shipping lanes open. Our force projection will go down, which means chances of of conflict will go up. So I I think the way we’re look should look at this is this is not just a a commercial competition between some Chinese firms and US firms. Certainly there’s there’s there’s important component that’s economic and you could talk about the hollowing out of manufacturing and and and and people have for twenty years.

I think there’s a larger larger issue here, and that is that as we look at the way the world is developing, we have to understand that the United States is is is at a position where it can, hold the line on some of these moments. And and and to the extent that it it it it it it it pushes deterrence. It it, you know, the the goal of the United States is to make sure that there is not a warrant over Taiwan. There’s not a warrant in the South China Sea. The the cost of this are high.

I think that this will keep the, you know, the United States out of a kinetic confrontational, keep our allies at a kinetic confrontation, we’ll keep the peace. It’ll keep the, economic order in one piece. The second we start letting it slip. It undercuts the alliance system. It cuts it undercuts the economic order.

And we go into a world in which we just don’t recognize anymore and certainly one where the Chinese will feel empowered to be to be more aggressive and not less aggressive. So We have to be very careful that what we’re doing is not provoking China for for the sake of provoking China, but but we also have to be very cogs of the fact that the reason the world has worked the way it has for the last fifty to a hundred years has been because of, you know, the systems we have in place now, and we have to be very, very vigilant sure those systems don’t fall by the wayside.

Essentially, a system of alliances and, a system of open, trade and financial flows.

That’s right.

Elliott, you have you get to have the last word here.

Well, first, that, this has been a terrific conversation. You know, one of the things that’s, MSA really, is very impressive that you can be as tough on China as you are and be in the business that you’re in. And I think maybe I forgot I ask you just to comment a little bit about that. I think, you know, I’m really struck by how for decades now, people have been so mesmerized by the China market. And they’re obsession with that and getting into it and, of course, benefiting from it, that it’s clouded their views of Chinese politics, the reality of of what that regime is really like.

You know, of course, with its attendant weaknesses and so on, but more importantly, just the brutality and awfulness of it, And I was wondering if you could talk a little bit about that. I mean, to what extent do you think our understanding of the Chinese economy has been shaped by that degree of wishful thinking. And do you see that diminishing at all, or you think that that’s gonna be with us for good?

I think it has been a a huge problem because if you look at what what inputs, what information do most Western corporates use what do Western funds use? What do Western policy makers use in terms of understanding what’s going on in China? A lot of them use the the material that comes out of Wall Street. It’s free. You know, it’s it’s free.

It’s it’s from from brand from very well known branded sources. And so that has become sort of the mainstream commentary. And the problem is the people doing that commentary are extraordinarily incentivized to let Beijing filter the message. To to let, to to talk their book. I mean, we we used to be silent on this and we’ve gotten increasingly loud because it’s a national security threat to let Wall Street talk about you know, basically mirror Beijing’s image in return for access to the economy.

Now some of that is decreasing because there is a recognition on our side. You see the special committee has taken this up, recently. But there’s also sort of an understanding Wall Street that they are not getting their end of the bargain. So there isn’t as much just complete, you know, blind obeisance on the Wall Street side to to mimic, you know, to to parodying the Beijing’s message. But it has been a huge problem that we found when we’re dealing with corporate America.

They have been overwhelming relying on people who are not giving objective takes on what’s happening here. They’re relying on people who are trying to sell them a service. And the service is access to China. It’s buying China. This.

It’s buying China that. And it means that the message has never been a clean one. It’s never been an honest one. So I think people’s eyes are finally opening right now. But man, it’s been a slow process and it’s not done.

I think we need to be having much more open conversations about this that go outside what, you know, Wall Street is detaining on on on, you know, the China store. Which is quite frankly never been right.

This is terrific. Thank you.

Our guest has been Leeland Miller, the founder and CEO of the China Beige Book, Lee, thanks a million for coming on. It’s been a great, a great conversation. And I hope we can have you back because the story is not going away. The is gonna be a very big story for us for the years ahead.

Yeah. This is great fun to do. And and and the way you guys sort of wrap in the national security side with the with with the market side is is a lot of fun. I get I get stuck doing one or the other a lot, but but not often do I get a chance to talk about both in the same in the same episode. So so thank you for the opportunity to to delve into these topics.

And we’ll have to give you another opportunity to do that, so my thanks as well.

Thank you both.